Dallas Fed study finds Big Mac prices track exchange-rate moves over time
Dallas Fed authors report that Big Mac-based real exchange rates remain highly correlated with nominal rates over long intervals.
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Dallas Federal Reserve Bank researchers Scott Davis, Ben Kim and Andrei Zlate examined how real and nominal exchange rates move together using Big Mac prices in an article published on 15 October. For six-month changes across 14 advanced foreign economies, they report a trend-line slope of 0.97 and a correlation of 0.79; for four-year changes, the slope was 0.78 and the correlation remained 0.78.
The authors connect the persistence of this relationship over four-year periods to the purchasing-power-parity puzzle. They say the findings are consistent with financial shocks playing a larger role in exchange-rate movements than monetary shocks. The Big Mac measure is an illustrative single-product proxy; the authors note that broader price indexes and official currency baskets are used in policy analysis.
Data
Big Mac-based real and nominal exchange-rate relationship
Exchange-rate statistics across 14 advanced economies, as analyzed by the authors.
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Dallas Fed research findings
Six-month period: slope 0.97 and correlation 0.79; four-year period: slope and correlation 0.78.
Methodology
Statistics are slopes and correlations reported in the Dallas Fed authors’ article; they are the authors’ findings, not an independent forecast.
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